1. Adopt different strategies for bull and bear markets
Never forget that bull and bear markets are completely different kettles of fish. The rules of the game fundamentally shift when moving from one to the other and an investor should alter his strategy accordingly.
In a bear market it is usually right to sell shares immediately following a profit warning as investors, being risk averse, may be unwilling to support the share price. It can also be right to take profits when a share price improves because the likelihood is that it will drop back when interest wanes. Even if the share price continues to rise the falling market will throw up other attractive investment opportunities.
By contrast, in a bull market, a profit downgrade from a company can create a good buying opportunity as ‚value investors are now prepared to buy into recovery situations. It is usually right to continue holding shares on positive news as ‚momentum buyers are likely to move in for the ride.
2. A diverse portfolio is key
Every investor, no matter how shrewd, experienced, or insightful, will get bets wrong. So one of the keys to achieving solid, long-term performance is to ensure that no single bad bet can impact the overall value of the portfolio too much. Avoid taking large bets on individual shares, no matter how confident you are feeling.
3 Buy stocks when they are attractively priced, sell when they look fully valued
Never be wary of taking profit on a stock that, in your judgment, has reached its full potential. Leave the last 10% to someone else as there are usually other cheaper alternatives in which to invest.
4. Treat sudden price spikes with caution
It can be correct, in a bull market, to add shares following a positive trading statement. However, after a sharp spike in the share price it is prudent to hold back as a better opportunity might arise at a later date.
5. Always keep your eye on the ball
The job of fund manager is, and ought to be, full-time, 24/7. For the good manager there is no rest from the Stock Market. It is vital to always keep in constant touch with market news, whether in London or Lanzarote, and to monitor all company updates, market sentiment and rumours etc. Keeping an eye on the ball is a good maxim in most professions but especially apt for those looking to make money via equity markets in an increasingly globalised economy. Significant events often happen rapidly and unexpectedly, across time zones, and the slightest shift in sentiment can escalate into sudden share price fluctuations.
6. Beware value traps
Value traps occur when shares appear cheap on the basis of historical information which might not apply moving forward. Background and economic situations can change quickly and the cheapness of a share can be an illusion. A prudent investor should always seek to assess the rationality of a cheap valuation rather than just assume there isn’t one.
A good recent example would be GAME group – which owns a chain of eponymously titled video game retail outlets in the UK. The group has good historical performance, good numbers based on conventional technical assessments, and solid finances – plus video gaming continues to be a boom market. The group’s recent woes and dismal outlook only become apparent when you look at the bigger picture.
The world is changing and the market with it: The communications revolution has advanced to the point whereby it no longer makes much sense for many consumers to purchase physical copies of games from brick and mortar stores.
7. Do not invest in companies that you do not understand
Some business models are more secretive or byzantine than others, and the level to which you understand them will depend a great deal on your own professional experience or knowledge. A lack of understanding as to what the company does and how it makes money does not of course, in itself, mean that the business won’t make a good investment. It does, however, mean that you are taking a lot on faith.
Crucially, in cases where the business model or service is technical or opaque to the point of being beyond most people, you can bet that a lot of other investors in that business will also be taking matters on faith. This can lead to problems building up unnoticed, and a dangerous disconnect between a business’ performance and its share price.
A good rule that if it is difficult to explain in relatively simple terms what a business does do not buy shares in it. This doesn’t apply to every small detail – an investor can hardly know the complete ins and outs of, say, a large multinational bank – but it does apply to the big picture. No matter how otherwise attractive or loved the stock is.
This could mean a tendency to avoid businesses in certain sectors which tend towards the technical or opaque, such as technology or area of finance. A personal example of mine is Glencore, the secretive finance leviathan: despite plenty of positive signs I would not have bought the company on its recent IPO as I simply would not have really known what I was betting on.
8. Don’t let a falling market scare you out of equities
‘Buy low sell high’ may be the universally recognised maxim of the stock market, but nevertheless a great deal of investors continue to do precisely the opposite.
It is vital, in a bear market where prices are falling, to hold your nerve and resist the all-too-human temptation to cut and run. Taking profit or cutting losses for strategic reasons is one thing, but for the long-term investor the bottom of the market is where you find the best opportunities, and is in fact the best time to consider adding, rather than selling. It’s not just a cliché to say that a good equities investor challenges the crowd; it is actually how the equities market works, and how anyone makes money from it at all. Others peoples’ flight from risk heralds fantastic opportunities to take advantage.
9. Markets anticipate events
Information permeates equity markets in such a way that markets will often anticipate events before they occur. Often a stock market sector such as house builders will rise before any recovery becomes apparent in the marketplace. It is always worth bearing this in mind when ones sees a sector or market recovering at a more buoyant pace than one would expect.
10. Pay close attention to the financial position of a company when investing
Do not judge a book by just looking at its cover. Inside may be a horror story or a great novel. Similarly a great stock consists of an attractive valuation, outlook and rating but must also have sound financing and management in place.